The $1.2 billion Boyabat hydroelectric project financing, Turkey's largest private hydro deal to date, closed on 15 January. The deal's sponsors are Turkish firms Dogan, Dogus and Unit, each providing an equal third of the $400 million equivalent equity portion. The $750 million debt has a 12-year tenor and comes from four domestic banks: Garanti, Yapi Kredi, Isbank and TSKB. Financial close was reached after a year and a half of negotiations.

The 510MW project is one of 24 plants and storage facilities planned on the Kizil River, in northern Turkey. The dam has been an aspiration for 50 years, and Dogus won the project in 1995, signing a concession with the government in 1998. In 2007 the project was awarded a license to operate on a merchant basis for 49 years, ditching the build-operate-transfer model.

The plant is scheduled to start commercial operations in November 2012 and construction has been under way since November 2008, funded with a bridge loan, which the long-term facility replaces. Garanti and Yapi Kredi are to each provide 27.5% of the long-term facility, while Isbank is to provide 25% and TSKB 20%. Dogus has a 31% stake in Garanti bank, and is the bank's largest stakeholder. The pricing on the 12-year debt is around 500bp over Libor door-to-door, not including arranger fees.

Following a grace period, which was included when the bridge loan was agreed in 2008, the project is to make its first repayment around May 2013, giving it six months from its projected start date to generate cash flow. The project company is to build a connection to the transmission grid, and its cost is included in the total capital expenditure for the project, though the state will reimburse it for this within 10 years.

Turkey's power demand is expected to increase over the next 10 years, and the government has said the country's capacity of around 40GW needs to double by 2020. There is currently over 13GW of hydro capacity online, while fossil fuel-fired plants make up the bulk of the remaining capacity.

A lot of new capacity is set to come online, however, and the government is privatising much of the power sector, selling off distribution companies and some generating assets, such as smaller hydro plants. Nine of the 21 Turkish discos have been privatised, and the deadline for the tender of 52 smaller hydro projects fell on 19 February. In terms of size, Boyabat sits between smaller-sized plants, which are entitled to renewables tariffs, and larger government-owned hydro stations.

The willingness of Boyabat's lenders to take full merchant risk gives an indication of current confidence levels in Turkish banking markets. Boyabat is too large to be entitled to Turkey's renewables tariffs and the market for long-term bilateral offtake contracts is yet to take off.

There is no strict requirement for Boyabat's sponsors to sign power purchase agreements in time for start up. Lenders are happy with the merchant profile, even one where revenues are in Lira, since spot market prices broadly move in line with the movements of the US dollar and Lira.

Demand-side pressure means that power prices in the spot market are above those of negotiated offtake contracts, according to sources close to the deal. This could change, however, as the market for PPAs matures amidst privatisation and as more plants come online. Discussions between independent power producers and discos currently focus on smaller deals, but when all 21 distribution regions are privatised, there will be a lot more activity, says Mert Tarlan, chief corporate finance officer at Unit. "Once the market becomes a little bit more mature, in two years perhaps, we might then be looking at more sizeable, longer-term offtake deals," he says.

Whilst many of the smaller hydro plants are run-of-river, Boyabat's dam-based system gives it the advantage of storing power capacity, and selling at higher peak prices, when demand is greatest. One banking source says a baseload price forecast of around $90-100 per MWh was projected for the first five years of Boyabat's operation, close to current spot market levels.

Another banker confirmed an assumption that was "slightly higher" than the renewables tariff of Eu55 per MWh ($74 per MWh) for smaller hydro projects.

There are unlikely to be big changes to the baseload fuel mix any time soon. Turkey's plans to build its first nuclear power plant have been riddled with delays, but the Turkish government has said a nuclear plant could be online by 2017. But this uncertainty makes it more difficult to forecast power prices beyond 2017, and the banks need to manage this risk, one banker says. Conglomerates Dogan and Dogus could choose to become offtake counterparties on an arm's length basis to cover some of the debt repayments. This decision is at the sponsors' discretion.

The construction contractor on Boyabat is a Dogus subsidiary, Dogus Insaat. The construction contract is turnkey, but not fixed price, and at time of writing the sponsors were set to make a final decision on which company would supply the equipment. Sources say it is likely to be a European firm, though Dogus Insaat is responsible for the acquisition and installation of the equipment. The supply contract has an escalation feature, typical in Turkish hydro projects, under which inputs priced in Turkish Lira escalate every year in line with domestic price indices. The turbine, however, is going to have a fixed price in Euros.

In earlier stages of the negotiations, project parties talked to ECAs about a possible role, but equipment costs would make up a smaller share of overall costs compared to, say fossil fuel projects, and the sponsors and banks were comfortable moving forward with a merchant structure without ECA involvement.

The deal has a debt service coverage ratio of 1.2x, and in the event that the completed project has a capacity below 510MW, there is a buy down mechanism on the debt, under which the sponsors have to immediately prepay some of the debt, says one banking source. This amount is based on the size of the capacity shortfall, and how that affects the project's DSCR. This could be the first time a buy down mechanism has been used on a Turkish energy project, the source says.

Boyabat Elektrik Üretim ve Ticaret Ltd. Sti.
Status: Closed 15 January
Size: $1.2 billion
Location: Northern Turkey
Description: 510MW hydroelectric plant
Sponsors: Dogan, Dogus, Unit
Equity: $400 million
Debt: $750 million
Lenders: Garanti, Yapi Kredi, Isbank, TSKB
Lenders' legal advisers: Clifford Chance, Verdi & Yazici (Turkish law)
Sponsors' legal advisers:Norton Rose, ASC Law (Turkish law)
Construction contractor: Dogus Insaat
Technical adviser: Poyry